February 10, 2021
“...to manage risk”.
A short response from a senior General Manager from a well known Kiwi business, when asked what their role was.
A lot of companies are surprised when they spend a year or two activity executing against their roadmap, but don’t seem to have made any inroads to achieving their objectives.
Unfortunately, that’s because all activity is not equal.
Companies & employees get caught up in the motion versus making progress. Motion is sometimes referred to as the ‘hamster wheel’.
You know the type.
Meetings about meetings. Endless briefings. Red/Amber/Green (RAG) status reports.
Lots of activity, but very little traction.
Compare that with progress.
Progress gets the company closer to the goal. But, progress also might show them that they’re on the wrong path, or that their goal is unattainable.
Quite simply the best way for a company to make real progress is to address their biggest risks as quickly, thoroughly, and cost-effectively as possible.
Risk can manifest itself in many ways:
- Can the team work together?
- Do the team have the (complementary) skills to realise the goal?
- Will the team be able to find problem/market fit?
- Will the team be able to find product/market fit?
- Is the market big enough?
- Can the team build a great product?
- Is the team good at selling?
- Can it be sold to target customers for a healthy price?
- Are the target customers identified?
- Can customers be acquired affordably?
- Can growth be managed?
- Will churn be manageable?
- Will competitors just copy the idea?
- Does the company have enough funds to do it?
And about a million more…
To help you understand areas of risk, we have developed a Risk Spectrum.
It’s pretty simple. The best things are simple, right?
Most risk can be categorised into 3 key principles:
- Showing is better than telling.
- External validation is better than internal opinion.
- Objectivity is better than subjectivity (data is better).
Each risk is rated from 1 (uncertain and high risk) to 5 (reasonable certainty and low risk).
Obviously, the goal is to move away from the 1’s and toward the 5’s.
Product/Market Fit Risk
You know you’re building the right thing.
 You think people will want to use your product.
 You have some early customers, but they’re affiliated with you.
 You have some early unaffiliated customers, but user acquisition economics aren’t great.
 Your customer base is growing organically at a moderate rate.
 Your customer base is growing quickly through affordable acquisition.
Product Quality Risk
You know you’re building the thing right.
 You are sure you can build a great product, but haven’t built one before.
 You previously built a great product.
 You have a prototype, and it’s very average.
 You have a prototype, and it’s good.
 You have a live, fully-functioning product and it’s amazing.
Your product requires strong execution across many functional areas (Marketing Sales, Design, Development, Support, etc)
 You don’t know what skills are required.
 The team only covers 1-2 of those areas.
 The team only covers 1-2 of those areas, but you have experts available to fill most of the gaps.
 The team covers most of those areas.
 The team covers all of those areas, and are superstars in their respective areas.
You can make enough money to become successful.
 You have no idea how large your target market might be.
 You found a consultant’s report that gives an estimate of market size.
 Your target market is small and unlikely to grow.
 You have a plausible top-down analysis of market size (People spend $X per year on this problem, and we think we can capture Y% of people)
 You have a plausible bottom-up analysis of market size (We think we can capture X% of target market A and Y% of target market B, and we plan to charge those users $X and $Y)
 Incumbent companies are huge and demonstrate that there’s a big market for what you’re doing (There are X potential customers for our product paying $Y/month)
 You have a plausible analysis, backed by experiments and data (There are X potential customers for our product and we’ve done some tests that prove each user would be willing to pay $Y/month)
Prove that you have enough capital needed.
 Your business will not be self-sustaining for a long time.
 You have enough capital for the immediate future.
 You have solid and dependable long-term capital sources available.
 With some effort, you would be able to get to break-even without any additional capital.
 You’re not dependent on additional capital because you can easily become break-even or profitable at any time.
Short-term Competition Risk
You’re different from existing players in the market.
 The market is saturated (huge incumbents, well-funded startups, etc). These companies are attacking your target market from many directions.
 There are many competitors, but they are all ineffective.
 There are very few competitors, but no strong differentiation between you and them.
 There are very few competitors, and strong differentiation between you and them.
 There are no competitors and there’s a high barrier to entry (which you have crossed).
Long-term Defensibility Risk
When companies try to copy you, you will be able to maintain your strong position.
 You don’t have any real competitive advantages.
 You don’t have any real competitive advantages, but have a strong position in-market.
 You have weak competitive advantages: strong position in-market, a few patents, marginally better unit economics than new entrants, etc.
 You have moderate competitive advantages: strong position in-market, unbeatable unit economics, a strong patent portfolio, etc.
 You have strong competitive advantages that get stronger as you grow.
Companies fail when risks go unmanaged.
Some of these risks can be addressed very quickly. Other risks require more time and effort.
Every company has a different set of pressure & risks.
But it’s vital the most dangerous ones are addressed as quickly and cheaply as possible.
Do an honest self-assessment of your company’s major risk areas.
Do you want to know the second most common pitfall of addressing risk?
Using up resources to address minor risks. If there’s little risk in an area, focus on other areas.
Do you want to know the most common pitfall of addressing risk?
A company spending all of their money developing a solution, but not launching or getting any customer feedback.
Create short-term and long-term risk mitigation plans for your company.
Some of the action items might be small and easy, like running a test campaign to estimate customer demand and market size.
Focus on building the right thing.
Then, focus on building the thing right.
We’d love to hear from you!
Eoghan & James.